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Polypore International Inc. Reports Operating Results (10-K)

February 25, 2011 | About:

Polypore International Inc. (PPO) filed Annual Report for the period ended 2011-01-01.

Polypore International Inc. has a market cap of $2.52 billion; its shares were traded at around $56.53 with a P/E ratio of 44.5 and P/S ratio of 4.9. Hedge Fund Gurus that owns PPO: Jim Simons of Renaissance Technologies LLC, Steven Cohen of SAC Capital Advisors, Manning & Napier Advisors, Inc. Mutual Fund and Other Gurus that owns PPO: Ron Baron of Baron Funds, Pioneer Investments, Jeremy Grantham of GMO LLC, Mario Gabelli of GAMCO Investors.

Highlight of Business Operations:

Our products and technologies are used in two primary segments: energy storage and separations media. The energy storage segment accounted for approximately 72% of our fiscal 2010 net sales. Primary applications for our membranes in this segment are lithium batteries and lead-acid batteries. Lithium batteries are the power source in a wide variety of electronics applications ranging from notebook computers, tablets, mobile phones to cordless power tools, and are emerging in applications such as electric drive vehicles ("EDV's") and electricity grid storage or energy storage systems ("ESS"). Lead-acid batteries are used in transportation and industrial applications. The separations media segment accounted for approximately 28% of our fiscal 2010 net sales. Primary applications for our membranes and membrane modules in this segment are hemodialysis, blood oxygenation, plasmapheresis and various high-performance microfiltration, ultrafiltration and gasification/degasification applications.

The lithium battery market is expected to grow at least 10% annually through 2015, driven by continuing demand for consumer electronics and by the application of lithium battery technology in new markets such as EDV's and electricity grid storage. We believe that growth in lithium battery separator demand will exceed battery growth due to increasing demand for large-format lithium batteries used in EDV's and other new applications. In the motor vehicle battery market, the high proportion of aftermarket sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing, recurring revenue base in lead-acid battery membrane separators. Lead-acid battery membrane separator growth is strongest in the Asia Pacific region due, we believe, to increasing per capita penetration of automobiles, growth in the industrial and manufacturing sectors, and a high rate of conversion to polyethylene-based membrane separators. The hemodialysis membrane market, which we believe will increase in excess of 6% annually, provides a growing, recurring revenue base for our synthetic dialysis membranes. The micro- and ultrafiltration membrane element market is expected to grow in excess of 8% annually, driven by several factors including the superior performance of membrane filtration and the increasing need for purity in end markets such as water treatment, food and beverage processing and pharmaceutical, semiconductor and flat panel display manufacturing as water sources dwindle and populations increase. 5

In the energy storage segment, our membrane separators are a critical performance component in lithium and lead-acid batteries, performing the core function of regulating ion exchange and thus allowing the charge and discharge process to occur between a battery's positive and negative electrodes. These membrane separators require specialized technical engineering and must be manufactured to extremely demanding requirements and specifications including thickness, porosity, mechanical strength and chemical and electrical resistance. For example, membrane pores must be large enough to allow ions to pass through, but small enough to prevent contamination from conductive particles that cause short circuits. Our energy storage businesses accounted for 72%, 71% and 74% of our net sales in fiscal 2010, fiscal 2009 and fiscal 2008, respectively.

Transportation and industrial applications. We develop, manufacture and market a complete line of high-performance polymer-based membrane separators for lead-acid batteries. Approximately 80% of our lead-acid battery separators are used in batteries for automobiles and other motor vehicles. The remaining approximately 20% are used in industrial battery applications such as forklifts, submarines and uninterruptible power supply systems. We believe that over 80% of lead-acid battery unit sales for motor vehicles are aftermarket batteries. Aftermarket sales are primarily driven by the size of the worldwide vehicle fleet rather than by new motor vehicle sales. According to WardsAuto.com, the worldwide fleet of motor vehicles has averaged 3% annual growth for over 25 years, providing us with a growing recurring revenue base. We believe another factor contributing to market growth is the worldwide conversion from alternative separator materials to the higher performance polyethylene-based membrane separators such as those we produce. Lead-acid battery separator growth is strongest in the Asia Pacific region due, we believe, to increasing penetration of automobile ownership, growth in industrial and manufacturing sectors, export incentives and ongoing conversion to polyethylene-based membrane separators.

In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance filtration and specialty applications. These membranes perform the critical function of removing sub-micron particulates from fluids and introducing or removing gases (gasification/degasification) within liquids. Both healthcare and specialty filtration applications require membranes with precisely controlled pore size, structure, distribution and uniformity. Our supply relationships with customers in healthcare and certain filtration applications such as pharmaceutical manufacturing are reinforced by the rigorous testing, clinical studies and/or regulatory approval that our membranes undergo prior to end-product commercialization. In some cases, several years of development and qualification are required. Our separations media business accounted for 28%, 29% and 26% of our net sales in fiscal 2010, fiscal 2009 and fiscal 2008, respectively.

Healthcare Applications. We develop, manufacture and market a complete line of patented polyethersulfone membranes for the hemodialysis market. Hemodialysis is the artificial process that performs the function of a healthy kidney for patients with permanent kidney failure, a condition known as End Stage Renal Disease ("ESRD"). In a healthy person, the kidney carries out certain excretory and endocrine functions, including filtering toxins from the blood and controlling blood pressure. For an ESRD patient on dialysis, the dialyzer membrane performs these critical filtering functions. The membranes consist of thousands of fibers that resemble hollow straws slightly larger than a human hair. These fibers have nanopores in their walls at a density of millions of pores per square inch. The size and distribution of these nanopores are designed to separate harmful toxins from the healthy blood passing through the dialyzer. Growth in demand for dialyzers and dialyzer membranes is driven by several factors, including the aging population in developed countries, longer life-expectancy of treated ESRD patients, improving access to treatment in developing countries and the trend in the United States towards single-use rather than multiple-use dialyzers. According to the European Renal AssociationEuropean Dialysis and Transplant Association, the number of worldwide ESRD patients has historically grown by approximately 6% per year. We estimate that continued patient population growth combined with conversion to single-use dialyzers and increasing treatment frequency will result in overall annual dialyzer market growth in excess of 6%.

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About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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